The atomic structure, energy of formation, and electronic states of vacancies in H-passivated Ge nanocrystals are studied by density-functional theory methods. The competition between quantum self-purification and the free surface relaxations is investigated. The free surfaces of crystals smaller than 2 nm distort the Jahn-Teller relaxation and enhance the reconstruction bonds. This increases the energy splitting of the quantum states and reduces the energy of formation to as low as 1 eV per defect in the smallest nanocrystals. In crystals larger than 2 nm the observed symmetry of the Jahn-Teller distortion matches the symmetry expected for bulk Ge crystals. Near the nanocrystal's surface the vacancy is found to have an energy of formation no larger than 0.5-1.4 eV per defect, but a vacancy more than 0.7 nm inside the surface has an energy of formation that is the same as in bulk Ge. No evidence of the self-purification effect is observed; the dominant effect is the free surface relaxations, which allow for the enhanced reconstruction. From the evidence in this paper, it is predicted that for moderate sized Ge nanocrystals a vacancy inside the crystal will behave bulklike and not interact strongly with the surface, except when it is within 0.7 nm of the surface.